sunset from behind the wire

sunset from behind the wire

Sunday, May 24, 2015

In Search of Modern China

Context and Precedence: A buddy of mine called me last night and invited me to his place in China. He lives in the penthouse of a high rise in Shenzhen (PRC where they fly the Chinese People's Republic flag), across the harbor from Hong Kong (PRC turf where they fly the Hong Kong flag). I usually stay at his place when I visit Southern China because (a) I'm cheap and he offers; (b) It's nicer than local hotels; (c) did I say that I'm cheap? The invitation set off a discussion of where China is going. I thought to share it with a bit of background.

About twelve years ago, I helped him move from the US to China, where he set up a series of businesses. The first made wooden doors. From there he moved to making large plastic palm trees that light up (earning him the nickname: The plastic palm tree king of China) then a  plastic injection molding factory, which he sold. Now a company that makes surfboards. 

He's almost 50 now, making him a bit long in the tooth, but he has come a long way. From being a white American who spoke no Chinese to an ex-pat who speaks rather good Chinese. There have been bumps along the way. He was taken hostage by organized crime once, got sick and experienced the wonders (and horrors) that are a Chinese ER room, and has had a series of Chinese girlfriends, none of whom worked out all that well. Whenever he gets into trouble, he calls me to bail him out, which I do reliably. As a result, I don't feel bad taking advantage of his hospitality, using one of his cars and drivers as if it's my own, and spending the night on Kowloon side at the Intercontinental on his account when I go to "town"(HK).

These days he quotes me liberally where he once thought that I exaggerated horribly and practices what I preached. 
  • The only way to become a millionaire in China is to start out a billionaire.
  • Chinese politics is akin to two chameleons making love.
  • If you have Chinese business partners, the only way they will be content is if you set things up to allow them to steal 10% from you. (because if they can't, they will presume that you are stealing from them and they will be distressed)
What is happening in China? 

He believes that China is tipping on a plunge into a recession, which would create VAST and predictable turmoil with the public, that has grown to expect the average 10% growth rate (1980-2011) and a diminishing growth rate since then. The Chinese government has maintained its legitimacy by promising economic progress. If the promise seems broken, it's hard to know how China's masses would react, but they will not react well.

I suggest that Chinese leaders in the one-party-system will become more nationalistic and aggressive to deflect attention from economic disappointment. In China this is horribly dangerous. Explaining why that is the case takes more room that I am inclined to use on this blog. Those of you who know me can call me on the phone if you want a greater explanation of why I feel that's bad. I'm not a doom-sayer when the Chinese are involved. I've had experience with them. It's bad but they will manage it. What it means for the USA is something else all together.

During the American/European 2008-09 financial crisis China announced a $586 billion stimulus package, almost 13% of GDP, in 2008. But unlike the U.S. stimulus in 2009, which was part of the federal budget, much of China's extra spending was channeled through state-owned banks and local governments. What ensued was a credit boom that has now left a large overhang of unsold housing, surplus industrial capacity and questionable debt. However in China, things work differently than they do in the US and I argue that it didn't hurt them. The housing supply that exceeded the demand is slowing and softening. China's economic predicament resembles America's: It needs a formula for sustainable growth that doesn't depend on repeated bursts of artificial stimulus, whether by deficit spending or prolonged easy credit.

Territorial Expansion based on Military Capabilities

The Chinese military's technical and numerical expansion is unabated. They plan to land men on the moon in the next decade and return them safely to Earth (as a demonstration of technical expertise). As the US contracts, China expands. My buddy and I agree that the social cost of Chinese expansion (increased military spending, etc.) will be offset by territorial gains. Those gains are obvious in the South China Sea but Taiwan is the jewel in the crown.

Will the US back Taiwan or will it fold? The Chinese are betting that we will fold. They've seen our leadership who are emblematic of American internal decline, and feel that they can get away with it.